A historic Loblaw property sitting empty on Toronto’s waterfront is the type that could be developed quickly and at a lower cost, the supermarket operator pointed out Thursday as it unveiled plans to create one of the country’s largest real estate investment trusts.
The proposed REIT would acquire more than $7 billion of Loblaw’s real estate assets and then sell units to the public by way of an initial public offering sometime in mid-2013, the company said.
Loblaw shares soared 12 per cent on the news, which will unlock some of the retailer’s value for shareholders and give it quicker access to capital to improve its business.
With Walmart Canada Corp. incorporating more grocery sections into its general merchandise stores and U.S.-based Target Inc. opening its first Canadian outlets in March, Loblaw is facing increased competition in its core business.
Want to publish your own articles on DistilINFO Publications?
Send us an email, we will get in touch with you.
“From a business strategy perspective, in the context of the real estate, it’s a very good time to do this,” said Ian MacCulloch, national research director with Colliers International.
REITs have significantly outperformed nearly every other investment asset class, which will make it easy for Loblaw to attract capital, he noted.
Using the proceeds to pay down Loblaw debt will free up more money to invest in the kind of information technology that will help it compete with rivals, MacCulloch said
“Spinning off its real estate assets should complement its core grocery business well, especially as it faces increased competition from recent new entrants into this space, such as Walmart,” said John Andrew, a real estate expert at Queen’s University.
Loblaw said it intends to maintain a significant majority interest in the REIT, which would initially own Loblaw properties but would later also acquire and develop other non-Loblaw properties.
As an example, the company said the REIT could more cost-effectively develop its property at Lake Shore Blvd. W. and Bathurst St. The historic building, a former Loblaw warehouse and at one time home to the Daily Bread Food Bank, has been vacant for eight years.
With about 250,000 square feet of available space, the building is too large for just a Loblaw’s store and would better suit a multi-retail development, the company said.
“We obviously believe we have an enormous amount of unrecognized value in our real estate portfolio,” Loblaw’s executive chairman Galen G. Weston told analysts on a conference call.
He said the company had looked at this opportunity “many times” over the years but decided now was the right time to proceed.
Loblaw said it plans to use the proceeds of the IPO to pay down debt, buy back shares and create a long-term source of capital to invest and grow.
The company previously announced plans to add new supermarket floor space at the rate of 1 per cent, or 500,000 square feet, a year for 2012 and the foreseeable future.
“The REIT, which we expect to be one of Canada’s largest, builds on our long-standing commitment to owning and developing quality real estate,” Weston said.
Loblaw’s real estate portfolio encompasses about 47 million square feet with an estimated market value of $9 billion to $10 billion.
The company said it plans to contribute about 35 million square feet, worth an estimated $7 billion, to the REIT and enter into long-term lease arrangements with the REIT on those properties.
Loblaw would pay market rents to the REIT, Weston said.
The REIT will hold mainly retail properties across the country, but about 10 to 15 per cent of the holdings will be warehouses and office buildings, the company said.
Loblaw expects the REIT’s financial results to have a minimal impact on the company’s consolidated profitability.
The timing of the initial public offering is subject to prevailing market conditions and regulatory approvals.
Loblaw’s shares closed up $4.60 at $38.20 on the Toronto Stock Exchange Thursday.
DBRS, the bond rating agency, confirmed its rating on Loblaw’s debt and preferred shares, along with those of its parent company, George Weston Ltd.